What are Contingent Rentals?

• A. Rentals that are fixed payments and never change.
• B. Rentals that represent increases or decreases in the lease payments made that result from changes in the factors on which lease payments are based occurring subsequent to the inception of the lease. Increases may occur due to increased construction cost or indexed interest rates.
• C. Rentals that are paid upfront only.
• D. Penalties for late payment.

Answer: (B)

Contingent rentals are those lease payments that can go up or down after the lease starts, based on changes in specific factors that the lease uses to calculate the payments. The idea is that the rent isn’t fixed from inception; it varies with events or indices that occur after the lease begins. That’s why the description focusing on increases or decreases in lease payments caused by changes in the underlying factors after inception—such as construction cost changes or index-based interest rate changes—best captures the concept.

Fixed payments that never change aren’t contingent. Paying upfront only isn’t contingent rental; it’s prepaid rent. Penalties for late payment aren’t contingent rentals either; they’re separate charges.